Auditor or Adviser? Auditor (In)Dependence and Its Impact on Financial Management

Fiscal transparency entails government financial reporting and independent audits. This study postulates and tests the dual functions of external auditors: an examiner who assesses government compliance with accounting rules and an adviser who supplements government financial management capacity. Computational text analyses show that localities, especially those with lower financial management capacity, are likely to adopt similar languages in summarizing the governments' financial conditions if they share the same auditor, suggesting auditor input in government disclosure. The auditor advisory role intensifies with a longer tenure. Further analyses show that auditor tenure is positively associated with the timeliness of audited financial reports. On the other hand, a long tenure reduces the likelihood of auditors' identifying internal control deficiencies and thus points to accountability concerns. These findings highlight the importance of government capacity-building in fiscal transparency initiatives and the unique challenges to auditor independence in the public sector.